Friday, March 07, 2008

Why Decoupling May Save The World Economy

Exports from emerging economies to U.S. have fallen, while exports to other emerging economies have remained strong:

Emerging markets now export more to China than to the U.S.:THE ECONOMIST -- “Decoupling” is the source of a great deal of controversy. Economists argue about whether or not emerging economies will follow America into recession. Recent data suggest decoupling is no myth. Indeed, it may yet save the world economy.

Decoupling does not mean that an American recession will have no impact on developing countries. The point is that their GDP-growth rates will slow by much less than in previous American downturns. Most enjoyed strong growth during the fourth quarter of last year, and some speeded up, even as America’s economy ground to a virtual halt and its non-oil imports fell.

Here are some reasons that globalization and decoupling can co-exist:

Reason 1:While exports to America have stumbled, exports to other emerging economies have surged (see top chart above). China’s growth in exports to America slowed to only 5% in the year to January, but exports to Brazil, India and Russia were up by more than 60%, and those to oil exporters by 45%. Half of China’s exports now go to other emerging economies. Likewise, South Korea's exports to the United States tumbled by 20% in the year to February, but its total exports rose by 20%, thanks to trade with other developing nations.

Reason 2:The popular argument that business cycles should become more synchronised in a globalized world rests on an out-dated impression that poor countries mainly export to rich ones. Instead, emerging economies’ trade with each other has risen faster and now accounts for over half of their total exports. Emerging markets as a group now export more to China than to the United States (see bottom chart above).

Reason 3:The four biggest emerging economies, which accounted for two-fifths of global GDP growth last year, are the least dependent on the United States: exports to America account for just 8% of China’s GDP, 4% of India’s, 3% of Brazil’s and 1% of Russia’s. Over 95% of China’s growth of 11.2% in the year to the fourth quarter came from domestic demand. China’s growth is widely expected to slow this year but to a still boisterous 9-10%.

Reason 4:Previous American downturns have often caused the prices of oil and other raw materials to slump, but this time China’s surging demand is propping up prices and fuelling booms in Brazil, Russia and the Middle East.

2 Comments:

An interesting corollary to this would be: If America is becoming less important as a market for emerging economies -- and rivals like India, China, and Russia are becoming more important for emerging economies -- what does that portend for American influence in the world?

Also, if exports to America account for only 8% of GDP, does that not shatter the belief that higher tariffs on Chinese imports will certainly only result in higher prices for American consumers and NOT a change in behavior on the part of the Chinese?